Simplification is the key - Centre for Policy Studies

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This paper makes 16 proposals to help simplify saving and improve flexibility. These involve bringing ISAs and pensions closer together, while enhancing incentives to save. This paper also discusses four alternatives for a unified tax framework for ISAs and pension savings products (including tax harmonisation between products with and without embedded life insurance). Such a radical simplification of the long-term savings arena is a prerequisite to encouraging more people to save more, and it would, for example, enable the industry to offer customers a simple savings continuum, perhaps under a “lifetime savings” banner. A limit of £45,000 a year for tax-incentivised savings An annual contribution limit of £45,000 for tax-incentivised saving is proposed, encompassing both ISAs and pension savings. Within this limit there should be a maximum contribution to pension savings of £35,000 which, roughly, represents breakeven in terms of the cost to the Treasury of upfront tax relief. 4 This would replace the existing annual ISA limits and pension saving allowances, although the two distinct products should remain the fundamental planks of retirement provision. 5 Tax relief should be granted at the saver’s marginal rate, limited to tax paid that year. 6 The ISA is perhaps the only remaining trusted savings product. These proposals seek to harness the popularity of ISAs to encourage long-term saving by permitting ISA assets to be transferable into pension savings products with tax relief at the standard rate (20%). Allow savers access to pension savings before retirement It is no secret that lack of access to pension savings is a serious deterrent to saving for the long term. Consequently it is proposed that savers should be given a one-off opportunity to withdraw, tax-free, up to 25% of their pension savings before reaching retirement. This would be deducted from their subsequent 25% lump sum entitlement upon retirement. Abolish the requirement to annuitise whilst still protecting the state Post-retirement access to pension savings should be amended so that savers are free to draw down their assets as required (taxed conventionally as income), without 4 5 6 i.e. after taking account of the changes to tax relief introduced in the 2009 Budget. It is stressed that a new savings product is not being advocated. The emphasis of the proposals is to enhance the capabilities of existing products. Except for the basic rate tax relief (20%) that non-taxpayers receive on contributions of up to £2,880 in a year, for a total contribution of £3,600; this should be retained. v
any annuitisation requirement, provided that a minimum of £50,000 of assets (at the SPA) is not accessed until the age of 75. Savers who have already secured an income equivalent to 40% of median earnings, say, from the State Pension, lifetime annuities or guaranteed private pensions, should be exempt. Annuities purchased with ISA-derived funds should be exempt from income tax, consistent with the tax-exempt status of withdrawals from ISAs. Broaden auto-enrolment of savings The effectiveness of auto-enrolment in boosting saving has been demonstrated abroad. Saving within a pension product is, however, unpopular; many people prefer to save in an ISA. Consequently, the DWP’s auto-enrolment initiative (for occupational schemes and NEST) should be broadened to include ISAs, a product that people like (and will therefore be less likely to opt out of). Initially, employer contributions (under auto-enrolment) should be restricted to pension savings (to ensure funds retention). Eventually, however, if ISA autoenrolment proves to be attractive, ISAs could also be included as an alternative for compulsory employer contributions. Concerns over savings persistency may require an initial leap of faith, but ISA assets are more “sticky” than many would expect. Furthermore, there could be some limited employer NICs relief targeted on lowearning under-25s, to encourage them to catch the savings habit early, subject to employee matching. Address gender inequality To avoid the income-in-retirement disadvantage often suffered by women in particular, couples should be able to contribute to one another’s pension savings irrespective of the recipient’s earned income. Tax relief should be granted at the contributor’s marginal rate, limited to the amount of tax paid in aggregate by the couple in that year. Allow pension assets to be bequeathed free of IHT Savers should be able to bequeath unused pension savings assets to third parties free of IHT (perhaps limited to £100,000), provided that the assets only go into the recipients’ pension savings. This would encourage a wealth cascade down the generations and reinforce a sense of personal ownership of pension savings. The paper extends this theme to include some proceeds of the sale of the primary residence or a business. vi
Page 1 and 2: Simplification is the key Stimulati
Page 3 and 4: THE AUTHOR Michael Johnson trained
Page 5 and 6: A note concerning data Finding a co
Page 7 and 8: These proposals depend upon having
Page 9: SUMMARY The UK’s long-term savin
Page 13 and 14: Thus, had pension savings products
Page 16 and 17: INTRODUCTION There has been a flood
Page 18 and 19: PART ONE: THE LONG-TERM SAVINGS LAN
Page 20 and 21: Japan’s savings ratio was once th
Page 22 and 23: scheme contribution rates are lower
Page 24 and 25: Table 1: Funded pension scheme asse
Page 26 and 27: 1.9 The international perspective A
Page 28 and 29: Table 4: ISA savers’ income distr
Page 30 and 31: Table 6: The complexity of the tax
Page 32 and 33: Figure 4: Income options upon retir
Page 34 and 35: savings by delivering a framework t
Page 36 and 37: Figure 7: When non-savers might sta
Page 38 and 39: There are other aspects to consider
Page 40 and 41: 3. THE EMPLOYERS’ PERSPECTIVE 3.1
Page 42 and 43: When employees with DC funds retire
Page 44 and 45: More specifically, employers are no
Page 46 and 47: Both businesses do have important c
Page 48 and 49: year. 91 Clearly, there are conside
Page 50 and 51: elderly and the wealthy, not least
Page 52 and 53: 5. THE TREASURY’S PERSPECTIVE 5.1
Page 54 and 55: Whilst the UK’s NRR for the mean
Page 56 and 57: Currently, reducing pensioner pover
Page 58 and 59: Table 13: Net cost of tax relief un
Page 60 and 61:
TEE would be hugely attractive to p
Page 62 and 63:
5.6 Tax treatment: international pe
Page 64 and 65:
PART II THE PROPOSALS AND THEIR IMP
Page 66 and 67:
Proposal 6: post-retirement, amend
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7. TAX SIMPLIFICATION: SOME OPTIONS
Page 70 and 71:
8. THE IMPLICATIONS FOR SAVERS Impl
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The higher rate taxpayers’ perspe
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segregated from any employer-sponso
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epresent a further step down the pa
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10. THE IMPLICATIONS FOR THE PENSIO
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Such principles would have to ensur
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Figure 13: The cost of pension savi
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pool of underlying pension assets (
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hardship” facility, whereby cash
Page 88 and 89:
occupational pension scheme benefit
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CONCLUSION We would save more, for
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ACKNOWLEDGEMENTS This paper was cat
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APPENDIX I Summary of proposals fro
Page 96 and 97:
APPENDIX II Value of assets in priv
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depending upon age at the time that
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APPENDIX V PRE-RETIREMENT ACCESS TO
Page 102 and 103:
APPENDIX VII FINANCIAL PLANNING TOO
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APPENDIX VIII THE MODEL 173 The
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GLOSSARY Alternatively Secured Pens
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pensions and earnings, but excludes
Page 110 and 111:
those with earnings above £4,940 b
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in cash terms, i.e. fixed at £770
Page 114:
The UK savings industry is barely t
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